Edgar Filing: HomeStreet, Inc.

HMST-2013.9.30-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-Q

________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2013

Commission file number: 001-35424

________________________________

HOMESTREET, INC.

(Exact name of registrant as specified in its charter)

________________________________



Washington		91-0186600
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

601 Union Street, Suite 2000

Seattle, Washington 98101

(Address of principal executive offices)

(Zip Code)

(206) 623-3050

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:



Large Accelerated Filer	¨	Accelerated Filer	x

Non-accelerated Filer	¨	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of outstanding shares of the registrant's common stock as of October 31, 2013 was 14,425,224.



PART I – FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS

Consolidated Statements of Financial Condition (Unaudited) at September 30, 2013, and December 31, 2012		4

Interim Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012		5

Interim Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012		6

Interim Consolidated Statements of Shareholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2013 and 2012		7

Interim Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2013 and 2012		8

Notes to Interim Consolidated Financial Statements (Unaudited)

Note 1 – Summary of Significant Accounting Policies		10

Note 2 – Significant Risks and Uncertainties		10

Note 3 – Investment Securities Available for Sale		11

Note 4 – Loans and Credit Quality		14

Note 5 – Deposits		26

Note 6 – Derivatives and Hedging Activities		27

Note 7 – Mortgage Banking Operations		30

Note 8 – Commitments, Guarantees, and Contingencies		35

Note 9 – Fair Value Measurement		36

Note 10 – Earnings Per Share		45

Note 11 – Business Segments		45

Note 12 – Subsequent Events		47

ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements		48

Summary Financial Data		50

Management’s Overview of Financial Performance		53

Critical Accounting Policies and Estimates		55

Results of Operations		56

Review of Financial Condition		63

Business Segments		66

Off-Balance Sheet Arrangements		72

Enterprise Risk Management		72

Credit Risk Management		72

Liquidity and Capital Management		78

Accounting Developments		81




ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	82

ITEM 4	CONTROLS AND PROCEDURES	82

PART II – OTHER INFORMATION

ITEM 1	LEGAL PROCEEDINGS	83

ITEM 1A	RISK FACTORS	83

ITEM 6	EXHIBITS	96

SIGNATURES		97

Unless we state otherwise or the content otherwise requires, references in this Form 10-Q to “HomeStreet,” “we,” “our,” “us” or the “Company” refer collectively to HomeStreet, Inc., a Washington corporation, HomeStreet Bank (“Bank”), HomeStreet Capital Corporation and other direct and indirect subsidiaries of HomeStreet, Inc.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)



(in thousands, except share data)	September 30, 2013			December 31, 2012

ASSETS
Cash and cash equivalents (including interest-bearing instruments of $21,747 and $12,414)	$	37,906		$	25,285
Investment securities available for sale	573,591			416,329
Loans held for sale (includes $385,110 and $607,578 carried at fair value)	385,110			620,799
Loans held for investment (net of allowance for loan losses of $24,694 and $27,561)	1,510,169			1,308,974
Mortgage servicing rights (includes $136,897 and $87,396 carried at fair value)	146,300			95,493
Other real estate owned	12,266			23,941
Federal Home Loan Bank stock, at cost	35,370			36,367
Premises and equipment, net	24,684			15,232
Accounts receivable and other assets	128,927			88,810
Total assets	$	2,854,323		$	2,631,230
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	2,098,076		$	1,976,835
Federal Home Loan Bank advances	338,690			259,090
Accounts payable and other liabilities	87,492			69,686
Long-term debt	61,857			61,857
Total liabilities	2,586,115			2,367,468
Shareholders’ equity:
Preferred stock, no par value, authorized 10,000 shares, issued and outstanding, 0 shares and 0 shares	—			—
Common stock, no par value, authorized 160,000,000, issued and outstanding, 14,422,354 shares and 14,382,638 shares	511			511
Additional paid-in capital	91,415			90,189
Retained earnings	185,379			163,872
Accumulated other comprehensive income (loss)	(9,097		)	9,190
Total shareholders' equity	268,208			263,762
Total liabilities and shareholders' equity	$	2,854,323		$	2,631,230

See accompanying notes to interim consolidated financial statements (unaudited).

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except share data)	2013			2012		2013		2012

Interest income:
Loans	$	19,425		$	18,512	$	54,920	$	52,344
Investment securities available for sale	3,895			2,517		9,552		7,205
Other	28			24		82		216
	23,348			21,053		64,554		59,765
Interest expense:
Deposits	2,222			3,908		8,078		12,985
Federal Home Loan Bank advances	434			297		1,113		1,506
Securities sold under agreements to repurchase	—			19		11		69
Long-term debt	274			305		2,274		1,041
Other	6			4		16		13
	2,936			4,533		11,492		15,614
Net interest income	20,412			16,520		53,062		44,151
(Reversal of) provision for credit losses	(1,500		)	5,500		900		7,500
Net interest income after provision for credit losses	21,912			11,020		52,162		36,651
Noninterest income:
Net gain on mortgage loan origination and sale activities	33,491			65,336		139,870		141,683
Mortgage servicing income	4,011			506		9,265		15,470
(Loss) income from Windermere Mortgage Services Series LLC	(550		)	1,188		1,063		3,748
Loss on debt extinguishment	—			—		—		(939		)
Depositor and other retail banking fees	791			756		2,273		2,262
Insurance commissions	242			192		612		551
(Loss) gain on sale of investment securities available for sale (includes unrealized gains (losses) reclassified from accumulated other comprehensive income of $(184) and $397 for the three months ended September 30, 2013 and 2012, and $6 and $1,349 for the nine months ended September 30, 2013 and 2012, respectively)	(184		)	397		6		1,349
Other	373			716		1,584		1,965
	38,174			69,091		154,673		166,089
Noninterest expense:
Salaries and related costs	39,689			31,573		113,330		81,148
General and administrative	9,234			7,148		30,434		19,304
Legal	844			312		2,054		1,471
Consulting	884			1,069		2,343		1,746
Federal Deposit Insurance Corporation assessments	227			794		937		2,751
Occupancy	3,484			2,279		9,667		6,160
Information services	3,552			2,411		10,122		6,128
Net cost of operation and sale of other real estate owned	202			348		1,740		8,917
	58,116			45,934		170,627		127,625
Income before income taxes	1,970			34,177		36,208		75,115
Income tax expense (includes reclassification adjustments of $(64) and $139 for the three months ended September 30, 2013 and 2012, and $2 and $472 for the nine months ended September 30, 2013 and 2012, respectively)	308			12,186		11,538		14,487
NET INCOME	$	1,662		$	21,991	$	24,670	$	60,628
Basic income per share	$	0.12		$	1.53	$	1.72	$	4.68
Diluted income per share	$	0.11		$	1.50	$	1.67	$	4.52
Basic weighted average number of shares outstanding	14,388,559			14,335,950		14,374,943		12,960,212
Diluted weighted average number of shares outstanding	14,790,671			14,699,032		14,793,427		13,414,475

See accompanying notes to interim consolidated financial statements (unaudited).

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2013			2012			2013			2012

Net income	$	1,662		$	21,991		$	24,670		$	60,628
Other comprehensive income (loss), net of tax:
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain arising during the period (net of tax (benefit) expense of $(362) and $1,564 for the three months ended September 30, 2013 and 2012 and $(9,845) and $3,135 for the nine months ended September 30, 2013 and 2012, respectively)	(673		)	3,525			(18,283		)	6,107
Reclassification adjustment included in net income (net of tax (benefit) expense of $(64) and $139 for the three months ended September 30, 2013 and 2012, and $2 and $472 for the nine months ended September 30, 2013 and 2012, respectively)	120			(258		)	(4		)	(877		)
Other comprehensive income (loss)	(553		)	3,267			(18,287		)	5,230
Comprehensive income	$	1,109		$	25,258		$	6,383		$	65,858

See accompanying notes to interim consolidated financial statements (unaudited).

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)



(in thousands, except share data)	Number of shares	Common stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income (loss)			Total

Balance, January 1, 2012	5,403,498	$	511	$	31	$	81,746		$	4,119		$	86,407
Net income	—	—		—		60,628			—			60,628
Share-based compensation	—	—		2,415		—			—			2,415
Common stock issued	8,951,474	—		86,818		—			—			86,818
Other comprehensive income	—	—		—		—			5,230			5,230
Balance, September 30, 2012	14,354,972	$	511	$	89,264	$	142,374		$	9,349		$	241,498

Balance, January 1, 2013	14,382,638	$	511	$	90,189	$	163,872		$	9,190		$	263,762
Net income	—	—		—		24,670			—			24,670
Dividends declared	—	—		—		(3,163		)	—			(3,163		)
Share-based compensation	—	—		1,098		—			—			1,098
Common stock issued	39,716	—		128		—			—			128
Other comprehensive loss	—	—		—		—			(18,287		)	(18,287		)
Balance, September 30, 2013	14,422,354	$	511	$	91,415	$	185,379		$	(9,097	)	$	268,208

See accompanying notes to interim consolidated financial statements (unaudited).

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended September 30,
(in thousands)	2013			2012

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	24,670		$	60,628
Adjustments to reconcile net income to net cash used in operating activities:
Amortization/accretion of discount/premium on loans held for investment, net of additions	56			(919		)
Amortization/accretion of discount/premium on investment securities	5,629			3,877
Amortization of intangibles	22			77
Amortization of mortgage servicing rights	1,347			1,551
Provision for credit losses	900			7,500
Provision for losses on other real estate owned	547			10,955
Depreciation on premises and equipment	3,231			1,864
Fair value adjustment of loans held for sale	15,602			(26,975		)
Fair value adjustment of foreclosed loans transferred to other real estate owned	(218		)	(489		)
Origination of mortgage servicing rights	(53,627		)	(33,606		)
Change in fair value of mortgage servicing rights	1,493			27,889
Net gain on sale of investment securities	(6		)	(1,349		)
Net gain on sale of other real estate owned	(526		)	(2,764		)
Net deferred income tax expense (benefit)	18,650			(11,494		)
Share-based compensation expense	932			2,415
Origination of loans held for sale	(4,151,302		)	(3,433,925		)
Proceeds from sale of loans held for sale	4,425,792			3,075,401
Cash used by changes in operating assets and liabilities:
Increase in accounts receivable and other assets	(36,680		)	(55,462		)
Increase in accounts payable and other liabilities	1,704			38,691
Net cash provided by (used in) operating activities	258,216			(336,135		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities	(286,741		)	(260,566		)
Proceeds from sale of investment securities	54,166			159,174
Principal repayments and maturities of investment securities	41,556			28,150
Proceeds from sale of other real estate owned	17,396			47,392
Mortgage servicing rights purchased from others	(20		)	(65		)
Capital expenditures related to other real estate owned	(22		)	(4,643		)
Origination of loans held for investment and principal repayments, net	(261,379		)	(62		)
Property and equipment purchased	(12,683		)	(8,355		)
Net cash used in investing activities	(447,727		)	(38,975		)



	Nine Months Ended September 30,
(in thousands)	2013			2012

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits, net	$	121,241		$	(27,941	)
Proceeds from Federal Home Loan Bank advances	4,477,102			4,975,490
Repayment of Federal Home Loan Bank advances	(4,397,502		)	(4,901,811		)
Proceeds from securities sold under agreements to repurchase	159,790			393,500
Repayment of securities sold under agreements to repurchase	(159,790		)	(393,500		)
Proceeds from Federal Home Loan Bank stock repurchase	997			330
Proceeds from stock issuance, net	128			87,791
Excess tax benefits related to the exercise of stock options	166			—
Net cash provided by financing activities	202,132			133,859
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	12,621			(241,251		)
CASH AND CASH EQUIVALENTS:
Beginning of year	25,285			263,302
End of period	$	37,906		$	22,051
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	24,969		$	16,642
Federal and state income taxes	6,796			11,746
Non-cash activities:
Loans held for investment foreclosed and transferred to other real estate owned	10,831			37,305
Loans transferred from held for investment to held for sale	54,403			9,966
Ginnie Mae loans recorded with the right to repurchase, net	$	3,775		$	3,330

See accompanying notes to interim consolidated financial statements (unaudited).

HomeStreet, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

HomeStreet, Inc. and its wholly owned subsidiaries (the “Company”) is a diversified financial services company serving customers primarily in the Pacific Northwest, California and Hawaii. The Company is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking. The consolidated financial statements include the accounts of HomeStreet, Inc. and its wholly owned subsidiaries, HomeStreet Capital Corporation and HomeStreet Bank (the “Bank”), and the Bank’s subsidiaries, HomeStreet/WMS, Inc., HomeStreet Reinsurance, Ltd., Continental Escrow Company, Union Street Holdings LLC and Lacey Gateway LLC. HomeStreet Bank was formed in 1986 and is a state-chartered savings bank.

The Company’s accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America (U.S. GAAP). Inter-company balances and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting periods and related disclosures. Although these estimates contemplate current conditions and how they are expected to change in the future, it is reasonably possible that actual conditions could be worse than anticipated in those estimates, which could materially affect the Company’s results of operations and financial condition. Management has made significant estimates in several areas, and actual results could differ materially from those estimates. Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation.

The information furnished in these unaudited interim financial statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission (“2012 Annual Report on Form 10-K”).

Shares outstanding and per share information presented in this Form 10-Q have been adjusted to reflect the 2-for-1 forward stock splits effective on November 5, 2012 and on March 6, 2012.

NOTE 2–SIGNIFICANT RISKS AND UNCERTAINTIES:

Regulatory Agreements

Homestreet, Inc. received notification from the Federal Reserve Bank of San Francisco that the Cease and Desist Order, dated May 18, 2009 issued by the Office of Thrift Supervision, had been terminated effective March 26, 2013.

On December 27, 2012, the Bank had been notified by the Federal Deposit Insurance Corporation (“FDIC”) and the Washington State Department of Financial Institutions (“WDFI”) that the Bank had taken appropriate corrective actions to address the memorandum of understanding ("MOU") in place since March 26, 2012, and consequently the Bank's MOU was terminated effective December 27, 2012. The Bank is no longer considered a “troubled institution” and is considered “well-capitalized” within the meaning of the FDIC's prompt corrective action rules.

NOTE 3–INVESTMENT SECURITIES AVAILABLE FOR SALE:

The following tables set forth certain information regarding the amortized cost and fair values of our investment securities available for sale.



	At September 30, 2013
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value

Mortgage-backed securities:
Residential	$	147,396	$	221	$	(3,354	)	$	144,263
Commercial	13,478		242		—			13,720
Municipal bonds	152,481		672		(5,712		)	147,441
Collateralized mortgage obligations:
Residential	153,460		1,473		(1,467		)	153,466
Commercial	17,457		—		(466		)	16,991
Corporate debt securities	75,888		1		(5,926		)	69,963
U.S. Treasury securities	27,744		3		—			27,747
	$	587,904	$	2,612	$	(16,925	)	$	573,591



	At December 31, 2012
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value

Mortgage-backed securities:
Residential	$	62,847	$	223	$	(217	)	$	62,853
Commercial	13,720		660		—			14,380
Municipal bonds	123,695		5,574		(94		)	129,175
Collateralized mortgage obligations:
Residential	163,981		6,333		(115		)	170,199
Commercial	8,983		60		—			9,043
U.S. Treasury securities	30,670		11		(2		)	30,679
	$	403,896	$	12,861	$	(428	)	$	416,329

Mortgage-backed securities ("MBS") and collateralized mortgage obligations ("CMO") represent securities issued by government sponsored entities ("GSEs"). Each of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by revenues from the specific project being financed) issued by various municipal corporations. As of September 30, 2013 and December 31, 2012, all securities held, including municipal bonds and corporate debt securities, were rated investment grade based upon external ratings where available and, where not available, based upon internal ratings which correspond to ratings as defined by Standard and Poor’s Rating Services (“S&P”) or Moody’s Investors Services (“Moody’s”). As of September 30, 2013 and December 31, 2012, substantially all securities held had ratings available by external ratings agencies.

Investment securities that were in an unrealized loss position are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position.



	At September 30, 2013
	Less than 12 months					12 months or more					Total
(in thousands)	Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value

Residential mortgage-backed securities	$	(3,133	)	$	121,234	$	(221	)	$	7,361	$	(3,354	)	$	128,595
Municipal bonds	(5,712		)	97,091		—			—		(5,712		)	97,091
Collateralized mortgage obligations:
Residential	(1,169		)	50,895		(298		)	10,678		(1,467		)	61,573
Commercial	(466		)	16,991		—			—		(466		)	16,991
Corporate debt securities	(5,926		)	69,826		—			—		(5,926		)	69,826
	$	(16,406	)	$	356,037	$	(519	)	$	18,039	$	(16,925	)	$	374,076



	At December 31, 2012
	Less than 12 months					12 months or more					Total
(in thousands)	Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value

Mortgage-backed securities:
Residential	$	(217	)	$	18,121	$	—		$	—	$	(217	)	$	18,121
Municipal bonds	(94		)	4,212		—			—		(94		)	4,212
Collateralized mortgage obligations:
Residential	(115		)	13,883		—			—		(115		)	13,883
U.S. Treasury securities	—			—		(2		)	10,238		(2		)	10,238
	$	(426	)	$	36,216	$	(2	)	$	10,238	$	(428	)	$	46,454

The Company has evaluated securities that are in an unrealized loss position and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any company- or industry-specific credit event. As of September 30, 2013 and December 31, 2012, the present value of the cash flows expected to be collected on all of the Company debt securities was greater than amortized cost of those securities. In addition, as of September 30, 2013 and December 31, 2012, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. The Company did not hold any equity securities as of September 30, 2013 and December 31, 2012.

The following tables present the fair value of investment securities available for sale by contractual maturity along with the associated contractual yield for the periods indicated below. Contractual maturities for mortgage-backed securities and collateralized mortgage obligations as presented exclude the effect of expected prepayments. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages mature. The weighted-average yield is computed using the contractual coupon of each security weighted based on the fair value of each security and does not include adjustments to a tax equivalent basis.



	At September 30, 2013
	Within one year				After one year through five years				After five years through ten years				After ten years				Total
(in thousands)	Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield

Mortgage-backed securities:
Residential	$	—	—	%	$	—	—	%	$	11,310	1.82	%	$	132,953	2.18	%	$	144,263	2.15	%
Commercial	—		—		—		—		—		—		13,720		4.49		13,720		4.49
Municipal bonds	—		—		—		—		19,890		3.51		127,551		4.41		147,441		4.29
Collateralized mortgage obligations:
Residential	—		—		—		—		13,643		2.17		139,823		2.65		153,466		2.61
Commercial	—		—		—		—		5,311		1.85		11,680		1.40		16,991		1.54
Corporate debt securities	—		—		—		—		33,238		3.31		36,725		3.75		69,963		3.54
U.S. Treasury securities	26,746		0.24		1,001		0.18		—		—		—		—		27,747		0.23
Total available for sale	$	26,746	0.24	%	$	1,001	0.18	%	$	83,392	2.88	%	$	462,452	3.11	%	$	573,591	2.94	%



	At December 31, 2012
	Within one year				After one year through five years				After five years through ten years				After ten years				Total
(in thousands)	Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield

Mortgage-backed securities:
Residential	$	—	—	%	$	—	—	%	$	—	—	%	$	62,853	2.81	%	$	62,853	2.81	%
Commercial	—		—		—		—		—		—		14,380		4.03		14,380		4.03
Municipal bonds	—		—		—		—		15,673		3.64		113,502		4.66		129,175		4.53
Collateralized mortgage obligations:
Residential	—		—		—		—		—		—		170,199		2.64		170,199		2.64
Commercial	—		—		—		—		—		—		9,043		2.06		9,043		2.06
U.S. Treasury securities	30,679		0.23		—		—		—		—		—		—		30,679		0.23
Total available for sale	$	30,679	0.23	%	$	—	—	%	$	15,673	3.64	%	$	369,977	3.33	%	$	416,329	3.11	%

Sales of investment securities available for sale were as follows.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2013			2012			2013			2012

Proceeds	$	1,972		$	39,635		$	52,566		$	159,174
Gross gains	—			434			322			1,780
Gross losses	(184		)	(37		)	(316		)	(431		)

There were $57.6 million in investment securities pledged to secure advances from the Federal Home Loan Bank of Seattle ("FHLB") at September 30, 2013 and $51.9 million in investment securities pledged to secure advances from the FHLB at December 31, 2012. At September 30, 2013 and December 31, 2012 there were $27.1 million and $18.6 million, respectively, of securities pledged to secure derivatives in a liability position.

Tax-exempt interest income on securities available for sale of $1.5 million and $1.3 million for the three months ended September 30, 2013 and 2012, respectively, and $4.2 million and $3.0 million for the nine months ended September 30, 2013 and 2012, respectively, was recorded in the Company's consolidated statements of operations.

NOTE 4–LOANS AND CREDIT QUALITY:

For a detailed discussion of loans and credit quality, including accounting policies and the methodology used to estimate the allowance for credit losses, see Note 1, Summary of Significant Accounting Policies and Note 5, Loans and Credit Quality to the Company's 2012 Annual Report on Form 10-K.

The Company's portfolio of loans held for investment is divided into two portfolio segments, consumer loans and commercial loans, which are the same segments used to determine the allowance for loan losses. Within each portfolio segment, the Company monitors and assesses credit risk based on the risk characteristics of each of the following loan classes: single family and home equity loans within the consumer loan portfolio segment and commercial real estate, multifamily, construction/land development and commercial business loans within the commercial loan portfolio segment.

Loans held for investment consist of the following.



(in thousands)	At September 30, 2013			At December 31, 2012

Consumer loans
Single family	$	818,992		$	673,865
Home equity	129,785			136,746
	948,777			810,611
Commercial loans
Commercial real estate	400,150			361,879
Multifamily	42,187			17,012
Construction/land development	79,435			71,033
Commercial business	67,547			79,576
	589,319			529,500
	1,538,096			1,340,111
Net deferred loan fees and discounts	(3,233		)	(3,576		)
	1,534,863			1,336,535
Allowance for loan losses	(24,694		)	(27,561		)
	$	1,510,169		$	1,308,974

Loans in the amount of $675.2 million and $469.8 million at September 30, 2013 and December 31, 2012, respectively, were pledged to secure borrowings from the FHLB as part of our liquidity management strategy. The FHLB does not have the right to sell or re-pledge these loans.

Loans held for investment are primarily secured by real estate located in the states of Washington, Oregon, Idaho and Hawaii. Loan concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or similar types of loans extended to a diverse group of borrowers that would cause them to be similarly impacted by economic or other conditions. At September 30, 2013 we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family and commercial real estate within the state of Washington, which represented 42.8% and 20.8% respectively. At December 31, 2012 we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family and commercial real estate within the state of Washington, which represented 40.4% and 22.5% of the total portfolio, respectively. These loans were mostly located within the Puget Sound area, particularly within King County.

Credit Quality

Management considers the level of allowance for loan losses to be appropriate to cover credit losses inherent within the loans held for investment portfolio as of September 30, 2013. In addition to the allowance for loan losses, the Company maintains a separate allowance for losses related to unfunded loan commitments, and this amount is included in accounts payable and other liabilities on the consolidated statements of financial condition. Collectively, these allowances are referred to as the allowance for credit losses.

For further information on the policies that govern the determination of the allowance for loan losses levels, see Note 1, Summary of Significant Accounting Policies within the 2012 Annual Report on Form 10-K.

Activity in the allowance for credit losses was as follows.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2013			2012			2013			2012

Allowance for credit losses (roll-forward):
Beginning balance	$	27,858		$	27,125		$	27,751		$	42,800
(Reversal of) provision for credit losses	(1,500		)	5,500			900			7,500
(Charge-offs), net of recoveries	(1,464		)	(4,998		)	(3,757		)	(22,673		)
Ending balance	$	24,894		$	27,627		$	24,894		$	27,627
Components:
Allowance for loan losses	$	24,694		$	27,461		$	24,694		$	27,461
Allowance for unfunded commitments	200			166			200			166
Allowance for credit losses	$	24,894		$	27,627		$	24,894		$	27,627

Activity in the allowance for credit losses by loan portfolio and loan class was as follows.



	Three Months Ended September 30, 2013
(in thousands)	Beginning balance		Charge-offs			Recoveries		(Reversal of)Provision			Ending balance

Consumer loans
Single family	$	13,810	$	(606	)	$	179	$	(1,251	)	$	12,132
Home equity	4,879		(377		)	273		(139		)	4,636
	18,689		(983		)	452		(1,390		)	16,768
Commercial loans
Commercial real estate	5,723		(1,306		)	—		51			4,468
Multifamily	690		—			—		80			770
Construction/land development	1,185		—			348		(141		)	1,392
Commercial business	1,571		—			25		(100		)	1,496
	9,169		(1,306		)	373		(110		)	8,126
Total allowance for credit losses	$	27,858	$	(2,289	)	$	825	$	(1,500	)	$	24,894



	Three Months Ended September 30, 2012
(in thousands)	Beginning balance		Charge-offs			Recoveries		(Reversal of)Provision			Ending balance

Consumer loans
Single family	$	12,865	$	(1,363	)	$	22	$	2,028		$	13,552
Home equity	4,851		(1,078		)	121		1,139			5,033
	17,716		(2,441		)	143		3,167			18,585
Commercial loans
Commercial real estate	4,343		(1,757		)	130		1,020			3,736
Multifamily	923		—			—		(151		)	772
Construction/land development	3,022		(1,823		)	193		1,472			2,864
Commercial business	1,121		(74		)	631		(8		)	1,670
	9,409		(3,654		)	954		2,333			9,042
Total allowance for credit losses	$	27,125	$	(6,095	)	$	1,097	$	5,500		$	27,627



	Nine Months Ended September 30, 2013
(in thousands)	Beginning balance		Charge-offs			Recoveries		(Reversal of) Provision			Ending balance

Consumer loans
Single family	$	13,388	$	(2,468	)	$	425	$	787		$	12,132
Home equity	4,648		(1,515		)	526		977			4,636
	18,036		(3,983		)	951		1,764			16,768
Commercial loans
Commercial real estate	5,312		(1,449		)	—		605			4,468
Multifamily	622		—			—		148			770
Construction/land development	1,580		(148		)	699		(739		)	1,392
Commercial business	2,201		—			173		(878		)	1,496
	9,715		(1,597		)	872		(864		)	8,126
Total allowance for credit losses	$	27,751	$	(5,580	)	$	1,823	$	900		$	24,894



	Nine Months Ended September 30, 2012
(in thousands)	Beginning balance		Charge-offs			Recoveries		(Reversal of)Provision			Ending balance

Consumer loans
Single family	$	10,671	$	(3,889	)	$	455	$	6,315		$	13,552
Home equity	4,623		(3,577		)	398		3,589			5,033
	15,294		(7,466		)	853		9,904			18,585
Commercial loans
Commercial real estate	4,321		(3,474		)	258		2,631			3,736
Multifamily	335		—			—		437			772
Construction/land development	21,237		(13,858		)	835		(5,350		)	2,864
Commercial business	1,613		(538		)	717		(122		)	1,670
	27,506		(17,870		)	1,810		(2,404		)	9,042
Total allowance for credit losses	$	42,800	$	(25,336	)	$	2,663	$	7,500		$	27,627

The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.



	At September 30, 2013
(in thousands)	Allowance: collectively evaluated for impairment		Allowance: individually evaluated for impairment		Total		Loans: collectively evaluated for impairment		Loans: individually evaluated for impairment		Total

Consumer loans
Single family	$	10,676	$	1,456	$	12,132	$	745,211	$	73,781	$	818,992
Home equity	4,585		51		4,636		127,226		2,559		129,785
	15,261		1,507		16,768		872,437		76,340		948,777
Commercial loans
Commercial real estate	4,468		—		4,468		372,905		27,245		400,150
Multifamily	315		455		770		38,997		3,190		42,187
Construction/land development	1,081		311		1,392		72,768		6,667		79,435
Commercial business	811		685		1,496		66,022		1,525		67,547
	6,675		1,451		8,126		550,692		38,627		589,319
Total	$	21,936	$	2,958	$	24,894	$	1,423,129	$	114,967	$	1,538,096

At December 31, 2012

(in thousands)

Allowance:

collectively

evaluated for

impairment

Allowance:

individually

evaluated for

impairment

Total

Loans:

collectively

evaluated for

impairment

Loans:

individually

evaluated for

impairment

Total

Consumer loans

Single family

11,212

2,176

13,388